The Huge Disconnect Between Appraisers and Our Market Activity

Westcoe Realtors, Riverside California…Right now in our Inland Empire area, there currently exists a huge (as in massive) gap between the incredible frenzied activity by buyers in our real estate market, and the appraisal industry…whose job it is to establish a value for the home so the new bank can make the proper sized loan for the buyer.  Appraisers took far too much heat for the real estate meltdown of the past few years, and as a result, between the new regulations enacted to “protect” the buyer, and their own fear of reprisal from “appraisal reviewers”, this market is not expanding at the rate is should.  Let us explain.

Most people assume that there are two parties to the sale of a home…the buyer and the seller.  However, unless the buyer is paying all cash for the home (a rarity in today’s times), there is actually a third player to the purchasing game, and that is the lender…and in the end, we must all play by the lenders rules, or they will take their ball (in this case, their money) and go home…and no one will get to play at all. 

The representative for the lender in this game is the appraiser, who evaluates every property the bank is asked to make a loan on for a buyer.  The appraisers job is to make sure the home is worth at least what the buyer is paying, therefore protecting the lender from making too big a loan on the property. 

Most of the time, in a normal real estate market (whatever that is!), since the buyer, seller, real estate agents, and the appraiser are all looking at the same data regarding value, establishing a price for the home everyone can agree upon is relatively easy.  Yes, there can be some discrepancies in establishing a value for some amenities (views, lot size, upgrades, etc.), but most of the time everybody gets on the same page….except for this market.

As you are aware from previous blog posts, right now our purchasing market is in a frenzy.  We have a very limited number of homes for sale relative to previous markets, and this is creating multiple offers on almost every property reasonably priced for sale, and over 65% of all homes that close escrow do so at a price that is equal to or greater than the original list price.  In essence, buyers are forced to “bid” for homes against other buyers, and as a result, the home generally sells to the highest bidder.  That is our market…fast, frenzied, and totally tilted towards the seller…which should lead to rising home prices.  Simple economics dictates that huge demand and limited supply leads to a rising price for that which is in demand…in this case, housing.

However, that is not happening yet.  Why?  Because of the third party in this game…the appraisers.

Now please, this is not a bashing of appraisers.  No angry comments from appraisers please.  We know you have a tough job.  However, until the appraisal industry as a whole becomes less concerned about the past, and more tuned to the current market, then our housing prices will remain relatively stable…because the problem is that we can sell the houses for higher prices, but the appraisers are afraid to let the market grow…because right now, appraisers are continually bringing in their appraisals at levels far below the actual sales price.  As a result, the bank will not lend the buyer the money they need to purchase the home, and the entire transaction blows up…only for the home to sell again at the same “high” price to another buyer who totally wants the home…and the process starts over again.

We actually had one appraiser last week tell one of our agents that they were more afraid of an appraisal review (the process where a supervisor, who has not seen the property, slashes the price for reasons unknown, since we never get a chance to discuss it with the reviewer) than they were having the transaction fall out of escrow.  You see, the slashing by the reviewer makes the appraiser look bad…the mere falling out of the sale simply looks like the appraiser is “protecting” the bank.  Therefore, this appraiser readily admitted that the low price they were giving the home (sold for $220,000, appraised at $180,000 because the appraiser used comparable sales from 4 miles away, not the 1/2 mile radius that we used to establish the $220,000) was because they were in fear of getting reviewed!  As a result, the buyer, the seller, and the bank all lost out on a sale that they all wanted…simply because of a low appraisal.  And ironically, the only person who gets what they want in this scenario is the appraiser, who gets paid up front by the buyer.  Everyone else loses, and the cycle begins anew.  We have sellers who are so frustrated because they have 20 people who want their home and are willing to pay a price for it, only to get slammed to the floor with a low appraisal.

The bottom line here is that fear rules the appraisal world these days.  The reviewers, who many times sit behind a desk in another city or state, only know that the Inland Empire area appears on many lists as being one of the top 10 areas in the country for foreclosures…so naturally, the prices must be falling…right?   No, they are not.  This is like slamming the barn door after the horse has escaped.  Yes, our prices have fallen a huge amount from their highs of a few years ago…but our market is besieged with buyers who now want to take advantage of these low prices and purchase a home.  Our market is ready to bounce back if only the appraisers would stop looking back, and start looking forward.  Maybe that is not the case in hard hit areas like Detroit, or other areas of the country…but right here, in Riverside and the Inland Empire, we are chomping at the bit.  Isn’t that what the government and all it’s stimulus packages want to happen? A resurgence of the housing market?

In the end, this situation will ultimately remedy itself over time…but the question remains…over what period of time.  We could be basically out of this mess and on our way to recover if not for the issues addressed here.  Only time will tell when we can begin the march forward.  Until then, we will continue to do what we can with what we’ve got…no matter how restricting it is for all our sellers.